French Law

In French Law, despite the fact that Articles 1134 and 1135 of the Civil Code specify that agreements must be executed in good faith, it is difficult to grasp precisely what is meant by, and the scope of the notion of good faith and contractual loyalty.

Good faith in the execution of the contract is classically defined as the expression of the duty of loyalty by each co-contractor so as not to offend the confidence that gave rise to the contract. The parties must act towards one another with loyalty, without fraud or malice.

Professor Le Tourneau reminds us that “this disposition, by its form, seems to be a general maxim of law, of ethical inspiration, long dormant but rich in potential.” Professor Cadiet specifies that “from the legal demand of good faith, jurisprudence has inferred a duty of loyalty in execution of contracts.”

Some authors consider that, besides the duty to cooperate placed upon the parties to facilitate the execution of the contract, a duty of transparency and of contractual honesty exists in those agreements where the “affectio contractus” is strong.

In theory, contractual loyalty can come in a multitude of agreements:

– Vigilance and the duty to be active;
– Fidelity to the spirit of the agreement;
– Respecting the interests of partners, proportionality and equilibrium.

Ideally, a contract motivated by the ideal of good faith ought to be just, that’s to say that there exists an equilibrium where each of the parties obtains a comparable advantage.

Yet in practice, it is with difficulty that we are able to defend the idea that contractual good faith constitutes a linchpin of French contract law. Along with contractual equilibrium, good faith acts in certain situations as a “moderating element,” a valve of commutative justice or of “contractual solidarity.”

At its core, the theory is a matter of agreement formation, based upon consensual agreement, which itself is founded upon the theory of the autonomy of will.

The axiomatic principle of the obligatory force of agreements (Pacta sunt servanda) is responsible for the principle of contractual security, a cornerstone of contract law that makes extensive application of good faith and contractual equilibrium difficult, not to say impossible.

We know that judges, confronted with flagrant abuses, have recourse to “creative interpretations” or to the discovery of “contractual consequences,” for example, based upon Article 1135 of the French Civil Code (like the duty of security or information).

Moreover, there are specific equitable rules, such as the well-known case of “lésion” (a very specific type of recourse), the notion of proportionality in matters of security guarantees, certain abusive clauses sanctionable by the Consumption Code, the abuse of economic dependency and a few other means of jurisprudential contract annulation when the cause is judged to be profoundly imbalanced.

Finally it appears that recent decisions of the Cour de Cassation (Commercial Chamber on 3 November 1992 and 24 November 1998) and the Second Civil Chamber from 17 Mars 2004 seem to impose a duty to renegotiate contracts that have become profoundly imbalanced in the course of their execution due to a change in circumstances.

It is best to approach these decisions in a prudent manner. A respected commentary from Professor Ghestin published in the Dalloz review in September 2004 confirms the view backed in last summer’s La Revue, i.e. that the theory of unpredictability rests upon the principle of persona non grata in private law.

English Law

In the same way as French law, English law does not set out good faith as an essential condition for the conclusion of a contract.

Yet in a general way the doctrine of equity is a tool by which legislators can protect the weaker party in contractual relations.

In interpreting agreements, English law favours literal interpretation over examining the psychology and the real intentions of the parties (French methodology).

Also, unlike in French law, liability (pre-contractual) for ending negotiations in an abusive manner is rarely encountered in England. This makes sense because parties who make commercial contracts are supposed to be conscious of the risks involved.

However good faith recourse is available for contract resolution in the case of inexecution of an agreement, or when a co-contractor refuses to divulge important information about his or her co-contractor.

A good faith notion does exist in certain types of contracts, notably in Trust Law. In the context of a trust, the agent must act with good faith towards the principal. The Trustees Act of 1925 s.23(1) specifies that so long as the trustee acts in good faith, he cannot be held responsible for the subsequent losses from the agent’s assignment.

The Unfair Contract Terms Act of 1977 and the Marine Insurance Act of 1906 also both make reference to good faith.

The notion of good faith appears again when a party invokes the principle of equity. The old English maxim is that “he who comes to equity must come with clean hands”, applying the old Roman adage of nemo auditur.

Finally, the UK has introduced good faith principle laws implementing European directives:

– Directive 86/653/EEC of 18 December 1986 on self-employed commercial agents,
– Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts

Looking to the future, in 1999 the Law Commission announced the possible creation of an English commercial code. If this project is ever realised, it is possible to foresee the inclusion of clear and general provisions relating to good faith.

German Law

German law sets out the superior ethical principle of treu und glauben (“sincerity and faith”). This principle applies both to the execution and to the formation of the contract.

Paragraph § 242 of the German Civil Code (BGB) establishes the obligation to execute contracts in good faith.

According to paragraph § 157, contract interpretation should be made in light of good faith.

Furthermore, paragraph § 138 considers null “any legal act contrary to accepted standards of good behaviour. Also null is any legal act by which a person exploits the neediness, the weakness or the inexperience of another to get that person to promise or agree to confer upon him or a third person, in exchange for what is given, proprietary interests that exceed the value of what is given to such a degree these proprietary interests are shockingly disproportionate to what is given.”

The principal of treu und glauben is equally found in certain special contracts, but German judges have a tendency to apply the fundamental paragraphs of § 242 directly.

However, in practice, German judges cannot judge in equity using § 242. This paragraph does not constitute a legal basis upon which to act nor does it have direct legal effect.

For almost a century now, the jurisprudence has attempted to define the function of paragraph § 242. This paragraph notably permits the completion, limitation, and concretisation of existing agreements. In addition, the text served a “correcting function” in unforeseeable matters before being codified in 2002 (§ 313).

In German law, the principal of good faith does not therefore constitute, a general autonomous legal basis.

And looking to the future?

After shedding light on these recent developments, we can understand the difficulties awaiting the drafters of an eventual “Eurocode” (a Civil Code or a European Contract Code) that may one day be in the works.

Just by taking the example of good faith, we can see that it is a single concept with a multitude of interpretations across different legal systems.

Opponents to European codification of the law of obligations justifiably maintain that each phrase recorded in a semantic and semiotic network can only be accessed from the inside by those who speak the same language at the same time and place.

Indeed the debate that raged between supporters (for example M. Von Bar) and the opponents (including Professor Lequette) of such codification is reminiscent of a famous Franco-German legal controversy between Savigny and Thibait (in favour of codifying the civil law). That was in 1812!